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In 2010, China was the world’s largest manufacturer and stands to maintain this in 2011. It is the biggest exporter of toys in the world, around 80% of world’s toys are originating there. Low labour costs and economic growth have allowed China to become the destination of choice for global toy businesses looking to offshore manufacturing. Consumers have benefitted from the resulting competition for production costs. However, the country’s one-child policy and rising wages are restricting manufacturing and labour growth, while the country has earned the unwanted tag as the world’s low-quality producer.
In the first of three articles, Euromonitor International explores the key parameters attached to China’s global manufacturing output while analysing the main challenges it faces.
China’s total manufacturing production expanded by 107.9% in real terms over 2005-2010, amounting to US$10.2 trillion, the largest total worldwide, more than double that of second-placed USA. However, with manufacturing making up 29.5% of GDP in 2010, one of the highest ratios in the world, China remains vulnerable to external demand shocks.
Source: Euromonitor International from national statistics/UN/OECD
China benefits from advanced infrastructure compared to other Asia Pacific nations, with infrastructure bottlenecks in India, for instance, a major obstacle for businesses. China ranked 91st out of 183 nations in the World Bank’s Ease of Doing Business index in 2011, considerably higher than its regional low-cost competitors such as Indonesia and India. However, South Korea and Taiwan have become much more business friendly countries in the region over the last five years whereas China’s ranking remained somewhat static.
Source: World Bank
Note: The Ease of Doing Business ranking was for 183 economies in total
Strong growth in manufacturing production allowed China to overtake Japan as the world’s second-largest economy in 2009 in US$ terms, as well as remain the leading exporter in the world with exports of US$1.6 trillion. However, China’s image has suffered from the “made in China” tag, which has become a byword for low-cost and low-quality among international consumers. More and more countries are now bringing additional safety checks on toys manufactured in China with the latest example being Brazil. Although China surpassed USA as Brazil’s largest trading partner in 2009, with bilateral trade reaching US$77 billion in 2011, Brazil plans to impose strict quality control on toy imports from China which will commence in the second quarter of 2012.
Relatively low labour costs, a large workforce and strong economies of scale attract major international toy brands to Chinese manufacturers. Consumers worldwide have also benefited from the manufacturing shift to China, as savings made by international companies are reflected in the prices of goods. However, China is losing its competitive advantage as a low cost environment for labour. The country’s one-child policy is resulting in shortages of labour, permitting workers the leverage to demand better wages. Rapid population ageing is narrowing the labour pool, while high inflation is increasing export and transportation costs. Wages per hour in overall manufacturing increased by 63.1% in real terms over 2005-2010.